Accounting for advances to employees and officers

2. Accounting for advances to employees and officers

Advances may
be provided to an employee regularly (i.e., monthly to employees who travel a
lot) or on as needed basis (i.e., once in a while for employees who attend a
conference). Depending on the frequency of advances there may be a few ways to
account for them.

2.1. Accounting for regular advances to employees

When
a company sets a predetermined amount to cover employee’s business expenses
each month, the accounting for employee advances is similar to the accounting
for petty cash.

For
example, at the beginning of each month Company ABC advances $1,000 to its
sales manager, John Smith, for travel-related expenses. To record the employee
advance, the company makes the following journal entry (this entry is posted once
at the time the first advance is made):

Account Titles

Debit

Credit

Employee Advances – John Smith

1,000

Cash

1,000

At
the end of the month, John Smith turns in his expense report along with the
original receipts. Let’s assume that in June 20X2 John Smith incurred $1,000 of
travel-related expenses: $600 mileage, $100 miscellaneous expenses, and $300
meals. He provided the expense report with the required receipts. The company makes
the following journal entry to record the travel expenses as well as next month
replenishment advance to John:

Account Titles

Debit

Credit

Auto Expenses

600

Miscellaneous Expenses

100

Meals Expenses

300

Cash

1,000

As
we can see, the company doesn’t make any changes to the Employee Advances
account. This is convenient because advances are provided monthly, so there is
really no need to adjust the Employee Advances account unless there is a change
in the monthly advance amount.

In
situations when John’s expenses are (a) less or (b) more than the monthly
advance amount of $1,000, (a) John would submit an expense report for less than
$1,000 and receive a replenishment for the amount of expenses submitted, or (b)
John would receive a reimbursement from the company for the excess of his
travel expenses over the advance amount of $1,000. For example, assume that
John’s expenses for July 20X2 are as follows: $300 mileage, $150 miscellaneous
expenses, and $300 meals. The company makes the following journal entry: